Meaning of Banking

Bank is an institution which acts as the mediator between those people who have surplus money and those who are in need of money.
The process of banking includes both Lending and Borrowing. The medium of advertisement conveys to the customer the requirement of the bank.

COMMERCIAL BANKING
Functions of Commercial banks:
ACCEPTANCE OF DEPOSITS
TYPES OF DEPOSITS

SAVINGS ACCOUNT

FIXED DEPOSITS

CURRENT ACCOUNT
ADVANCING OF THE LOANS. ISSUING OF TRAVELLERS CHEQUES. PROVIDIING ATM & CREDIT CARDS FACILITY ETC. SAFE DEPOSIT VAULTS. COLLECTING VARIOUS BILLS. OPENING OF DEMAT ACCOUNT. HOME BANKING. CREDIT CREATION.

RECURRING ACCOUNT

CENTRAL BANKING
Central bank is an apex bank which has overall control of banking system in the economy. Every country must have one bank as a central bank. In India RBI is Central Bank.

Functions of Central Banks.

Monopoly of note issue. Banker of the bank. Banker Agent & Advisor to the government. Lander of the last resort. Custodian of foreign Exchange. Central clearing house. Publication of statistical information. Control of credit.

Monetary Policy
Introduction: Monetary policy is one of those macroeconomic concepts which is more frequently talked but not precisely defined. There is no fixed objectives of monetary policy. They have been changing over the years Definitions: 1.According to H.G.Johnson, monetary policy is a policy employed by the central bank to control the supply of money as an instrument for achieving the objectives of general economic policy

2.According to Paul Einzig, Monetary policy refers to the deliberate and conscious credit control measures adopted by central bank of a country designed to ensure a more efficient operation of the monetary system Objectives of Monetary policy: 1.Stability of external value of currency: During the Gold standard time a currency was convertible into gold according to predetermined rate to maintain the external value of the currency (expanding credit during inflow of gold and contracting credit during outflow of gold)

2.Stable price level: Next objective is to ensure a stable price level internally irrespective of the impact of the external value of the currency 3.Maintenance of full employment: World wide Depression produced mass unemployment. Keynes suggested the Govt to carry out this policy to arrest the unemployment situation. It is commonly called as economic stability 4.Rapid economic growth: During the middle of 1950s rapid economic growth has been added to the objectives in US,UK,Japan and Russia to recover the economy from IInd WW.

5.BOPs equilibrium: During 1960s it has been added by most of the affected countries 6.Maintenance of stable interest rate: A reduction in interest rates would force banks to lower their lending rates (Repo rate) and borrowing rates (Reverse Repo rates). Due to financial sector reforms, RBI has moved towards a market oriented interest rate scenario 7.To control inflation: Controlled expansion of money supply with the public and the banking system would contain the inflationary pressures in the economy

Instruments of Monetary policy

Quantitative Methods 1.Bank Rate Policy 2.Open Market Operations 3.Cash Reserve Ratio

Qualitative Methods 1.Fixation of Margin Requirements

2. Consumers Credit
3.Control through Directives

4. Moral Suasion
5.Rationing of Credit 6.Direct Action

Positive Aspects: 1.Control of inflation 2.Economic growth 3.Healthy competition 4.Increase in bank deposits 5.Capital formation

Negative Aspects: 1.Huge budgetary deficit 2.Lack of banking infrastructure 3.Management problems of banks & FIs 4.Problem of black money 5.Existence of unorganized money market 6.Changing Govt policies